You finally resolve to get back in shape, so you hire a personal
trainer to help you achieve your goals. At your first meeting, the
fitness trainer asks you a series of questions and measures you,
weighs you and pinches around to determine your level of body fat.
You're at the beginning of a long road. It is vital not only
that you know where you're starting from, but also that you
head down the right path for you.

It's a lot like the process of buying a franchise
business--you cannot afford to make a mistake on such a large
financial investment. Like working out at the gym, you can get hurt
if you're not careful and well-informed about the process. To
locate and evaluate a franchise that will be a good fit for your
needs, and to do it right, you have some research and work to do.
You'll also be using investigative muscles you've never
used before.

Answering the Tough
Questions
Focus your attention on the type of business that interests you. If
you plunge into the franchise marketplace without giving some
thought early on to the type of business for you, you'll be in
trouble. Like walking cold into a gymnasium full of complicated,
intimidating workout equipment, you won't know where to
start.

Are you intrigued by a conventional retail business, or do you
see yourself working from home? Do you live for food? Do you like
serving the public, or do you want to sell to corporate customers?
Do you want to run the business full time or part time?

Obviously, these questions must be answered in the context of
your interests, your resources and your particular level of
financial fitness. Assess the capital you have immediately
available to you and other likely sources of funds. If you're
about to sell your $100,000 baseball-card collection or liquidate
your priceless stockpile of Batman paraphernalia, by all means
include the proceeds in your calculations. You may want to talk to
a local banker about loan programs for which you could qualify (ask
about small-business loans backed by the SBA), talk to an
accountant, even visit with your rich Uncle Ned. This personal
self-assessment will tell you whether you should be looking at a
$700,000 retail franchise or a $40,000 homebased franchise.

Working the Trade-Show
Circuit
The internet will throw a lot of options and hype at you; a
franchise trade show will let you try out the equipment. Most
cities have one or two franchise and business opportunity trade
shows in a given year. If one comes to your town, take the time to
attend. A trade show is a terrific opportunity to see what the
market is offering and speak with knowledgeable franchise
representatives.

Let your key research begin here: Ask the right questions of the
representatives. You know from your personal assessment what type
of business you're seeking, how much cash you have on hand to
invest and how much you qualify to borrow from a lender. So be sure
to ask a few initial qualifying questions: Does the company require
prospects to have a certain amount of cash on hand? What is the
total investment range for the franchise? (They should know the
range, since this information appears in the franchise's
disclosure document, which we'll discuss later.) Are there
business-experience qualifications required of prospective
franchisees? If the answers to these questions pull you out of your
range, don't waste your time--move on down the line. Make the
effort to find the program that interests you and hits your
investment sweet spot.

Plan your time at the show carefully. Expect to pick up a ton of
general brochures and application forms--carrying these around for
a few hours will tone your shoulder muscles. Make sure you have a
full collection from any franchise booth that interests you, and
leave them your complete contact information. A personal business
card makes the best impression.

Pumping Iron: Lifting the UFOC

Not many franchisors will deliver a disclosure document to you
when you walk up to the trade-show booth. If you attend a sales
presentation or a "discovery session," or speak
one-on-one with a sales representative at a hospitality suite or
some other off-site location, most companies will hand you a
franchise disclosure document at that time. So just what is this
document?

All franchising companies in the United States are required to
deliver a complete disclosure document known as the Uniform
Franchise Offering Circular, or UFOC, to a prospective franchisee a
couple of weeks before money changes hands or the prospect signs a
binding legal obligation. For anyone researching a franchise
investment, this is an indispensable document. As soon as you
become at all serious about a particular franchise, it's time
to get a copy of the company's UFOC. Franchisors are not
required by law to give you a UFOC until fairly near the close of
the transaction, so it's your responsibility to request one
earlier. Some companies wait until you come through headquarters on
a visit; others allow you to view the document online. Either way,
your goal is to get your hands on the UFOC so you can obtain a full
picture of the program as early as possible.

Once you have the company's UFOC, read it carefully. If
you're an old hand at corporate investing, the document will be
vaguely familiar to you--it's based on similar disclosures
required under corporate securities laws. If you're new to
these documents or if it's been awhile since you cracked open a
securities offering prospectus, you're in for a pleasant
surprise: All UFOCs are written in plain English and organized
along the same detailed outline.

Resistance Training:
Crunching Numbers
A UFOC is basically broken into three parts: 1) a descriptive
narrative describing 22 various important aspects of the franchise
offering, 2) a copy of the contracts you sign when you become a
franchisee, and 3) a set of the franchisor's audited financial
statements (or those of the company guaranteeing the obligations of
the franchisor).

Start at the back. An experienced accountant can tell you a lot
about the financial health of the franchising company by reviewing
its audited financial statement. Does it have the financial muscle
to survive long enough to continue servicing your franchise
business, or is it teetering on the edge of a financial abyss? How
many franchisees paid royalties last year, and what was the rough
annual average payment? Did the company make money from its
operations last year, and how do the numbers compare to the
previous two years? Are any disturbing trends buried in the
numbers? If you're not conversant in number-speak, seriously
consider getting professional assistance. You'll probably need
an accountant to help with the establishment of your business
anyway, so find one now, and have the UFOC's financials
reviewed.

That brings us to the franchise contracts--everybody's
favorite mental workout! A word of caution here: Your franchise
agreement is not required to be written in plain English. It's
typically quite long (30 pages of single-spaced verbiage is not at
all unusual), and it will strike you as remarkably one-sided,
seeming to favor the franchisor at every turn. Let a good lawyer
help you review it. Find one who has experience working with small
businesses, and let the lawyer explain how it affects your
interests. If your lawyer finds 27 ways she would like to change
the contract before you sign it, arrange a discussion with your
franchisor representative to find out how the company handles
negotiated-change requests. Some franchisors insist on their
standard contract; others will negotiate. Generally, in my
experience, the younger the franchise program, the more willing the
franchisor is to negotiate. In any case, it's always better to
have a lawyer on your team to help you assess the legal
situation.

Shaping Up, One Item at a
Time
Now that you have professionals working on the more complicated
aspects of the UFOC, turn to the plain-English narrative
description. The first few items (Items 1 through 4) tell you all
about the franchise program and the franchisor, its identification,
address, range of business activity, history, involvement in other
franchise programs, its managers' business experience, and its
litigation and bankruptcy background. This is key information for
checking out the depth of the company's experience and the
nature of any serious legal problems. Don't be surprised if you
find a few civil cases or arbitration cases against franchisees
disclosed in Item 3--running to court or arbitration to resolve a
dispute is an inescapable part of modern business life, and
franchises are certainly no different from other businesses. In
fact, the franchise sector is more litigious than most business
sectors.

The next few items in the UFOC (Items 5 through 10) lay out the
fees and estimates of the new franchisee's total expenses and
disclose whether the franchisor provides financing for any aspect
of the investment. Item 7 is most useful among these items;
it's a chart summarizing all the expenses you're likely to
incur when you establish a new franchise business. Make sure your
accountant sees this information--it will be useful in your
financial planning.

Items 11 through 14 detail the services and rights the
franchisor provides you as a franchisee--everything from assistance
with your grand opening to training to the granting of trademark
and patent rights. Territorial protection, an issue close to the
hearts of most franchise investors, is described in Item 12.

Other items worth noting are Item 19 ("Earnings
Claims") and Item 20 ("List of Outlets"). An
earnings claim is any statement that conveys how your franchise
will perform financially or how existing franchisees are
performing. A franchisor cannot say, "These businesses
generate at least $450,000 a year" (even if it's true)
without making the statement in Item 19 and disclosing the
reasonable basis for the statement and the assumptions that
underlie the claim. Item 19 disclosures, which appear in an
estimated 30 percent of all UFOCs, are therefore eagerly read by
prospective franchisees. If the UFOC has no Item 19 statement, you
must rely on the performance information provided by existing
franchisees.

Item 20 lays out a statistical picture of the entire franchise
system over the past three years. It includes a list of current
franchisees as well as people who left the franchise system for any
reason in the past fiscal year. Use this vital contact information
when looking to interview franchisees about their experiences with
the program.

Just as it takes a little sweat to get in shape, it also takes
some hard work to find a franchise business that meets all your
needs--but the rewards can be well worth it.

The Real McCoy?

The question prospective franchisees ask me most frequently is,
"How can I find out if the franchisor is legitimate?"
Some people imagine there's some sort of national clearinghouse
that can confirm legitimacy on the telephone. There is no such
place, but there are clues ripe for the picking. Here are five
likely sources of information to help you answer that all-important
question.

1. Even though it may not tell a complete story, the UFOC
will tell you volumes about the franchisor and its background.
What sort of business experience do the company's key
executives have (Item 2)? What does it say about the company's
history of litigation (Item 3) and bankruptcy (Item 4)? Is the
trademark registered with the federal Patent and Trademark Office
(Item 13)? What do the system numbers (Item 20) say about the
number of franchises that have opened for business in the past
three years?

2. Another great source of information: existing and former
franchisees. Call them (they're listed in Item 20 of the
UFOC), and set up interviews. Ask them about their experiences with
the franchise, the training, the investment and how their business
is performing. And ask the ultimate litmus-test question: Would you
make the same investment knowing what you know now? If the
franchise offering is new and there are no existing franchisees to
call, you have no comparable source of information.

3. State agencies can be most useful in your evaluation,
particularly if you're in a state that regulates franchise
sales. The franchise registration states are California,
Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York,
North Dakota, Rhode Island, South Dakota, Virginia, Washington and
Wisconsin. Each of these states requires a franchisor to register
to offer franchises. Find out if the franchise you're
interested in is registered before getting too serious.

4. The Better Business Bureau provides reports of customer
complaints received. For more information, go to www.bbb.org.

5. The FTC brings legal enforcement actions, large and small,
against franchising companies. Look over its recent activity at
www.ftc.gov.

Franchise Fitness
ChecklistMuscled up and fit to buy:

The franchisor is financially strong; your
accountant is satisfied.

Franchisees in the system give their investment
decision the thumbs up. Some systems make their franchisee
"grades" available online for a modest price (see
www.fransurvey.com).

The business offers a good fit with your
interests, and you're excited to jump into the business. Even
better, you have experience in this type of business.

The revenue potential looks strong.

Market trends are in favor of this business.

A good location or good customer base is available
in your home market.

The franchise system shows steady growth.

Still flabby and needs to step up its regimen:

There is a load of litigation reported in the
UFOC, revealing a rough franchisor dispute-resolution style.

Franchisees in the system say they feel trapped
and would not make the same investment again.

Franchisees in the system say the training is
inadequate.

Your lawyer says the contract is heavy-handed and
poorly prepared, and your accountant wonders whether the franchisor
will be around in 12 months.

Your state franchise or consumer-protection agency
says the franchisor is not registered (if required) or that
numerous complaints are on file.

The franchisor provides you no UFOC, or the UFOC
they give you is out of date, incomplete or not registered (if
required).

Andrew A. Caffey is a practicing franchisor attorney in the
Washington, DC, area and an internationally recognized specialist
in franchise and business opportunity law.